Buying and financing your next home can take time, money and even add some frustrations. Here are the answers to ten of the most commonly asked questions related to financing a new home.
- Can I Buy Real Estate With No Money Down?
Yes. Many people have bought real estate with no money down through the VA loan program.
Can you buy real estate with no cash or credit; probably not. We’re not saying it’s impossible. We’re just saying, don’t count on it.
- What Is 3/2 Financing?
There are many loan programs directed towards first-time buyers that will allow the purchase of property with as little as 3% down.
The purchaser will put up 3% of the sale price and another party will put up 2%. Programs differ but the second party involved can be any of the following:
- A friend or relative providing a gift
- A friend or relative providing a loan
- An employer providing a loan
- An employer providing a loan that does not have to be repaid if the individual stay with the company for a certain amount of time.
- A community group providing a loan or grant
- A government agency providing a loan or grant
- A lender who provides both 95% financing and a 2% loan
For details, please contact your local lenders and real estate brokers.
- What Is A Broker’s Trust Account?
When it comes to real estate, trusts account are a little different. A broker’s trust account is typically an account that is operated by a real estate broker that is used to hold the buyer’s deposits until closing. The money in a broker’s trust account is a credit to the buyer at closing. If the sale does not close, then several alternatives are possible:
- The buyer and the seller may agree to return the trust money to the purchaser.
- The buyer and seller may agree to give the money to the seller to resolve claims that they buyer did not perform as agreed under the sales contract.
- The buyer and seller may dispute how the funds should be distributed.
- What Is A Lender’s Escrow Account?
Sometimes homes are bought with 80% or more financing from a single lender. The lender generally requires the borrower to make monthly payments to a lender’s escrow (trust) account. The lender escrow account accumulates money to assure that the borrower’s property taxes and property insurance are paid, which in turn reduces the lender’s risk.
Typically the lenders collect 1/12th of the annual costs for the property insurance and taxes each month. They are allowed to keep as much as one full year’s worth of tax and insurance payments in the account, and a two-month safety margin, plus $50. However the excess must be returned to the borrower if the surplus is more that $50. The only time the account is likely to have 12 monthly payments plus the two-month cushion is just before the property taxes or insurance are due.
In the coming year monthly payments will rise or fall, sometimes surplus or shortage will appear in the account, no matter the case, every year lenders must account to borrowers a statement with how much is in the account. If the surplus exceeds $50, the excess is returned to the borrower. There are some states that require lenders to pay interest on escrow accounts, and others do not.
- What Is MCC Financing?
States have better credit than citizens; they can potentially borrow money at low rates. The Mortgage Credit Certificate (MCC) program is when a state can lend money to first-time buyers and low income buyers, most of the time at below-market rates and with little down (rates that cover the interest cost of floating bond issues and at least 1 to 5% down).
The MCC’s allow you to borrow money and then write off a portion of the interest, up to 20%, as a tax credit. The remaining interest deduction is just a write off.
You can speak with some local lenders to see if MCC financing is now available. Often times, funding can be limited in this type of programs, and they run out of money quickly.
- Can I Buy A House After Bankruptcy?
There are two issues to consider when it comes to buying a home after bankruptcy:
- Lenders will like to see two years of good credit after the bankruptcy has been resolved. There have been instances where lenders will finance with at least a full year of good credit.
- Lenders will also want to know the reason you have filed for bankruptcy. Financial negligence and financial hardships can make the difference when finding the right lender.
- Why Does Closing Cost So Much?
State and local governments have discovered that real estate transfers are opportunities to tax with little political responsibility. If real estate transfer taxes are raised, many of those impacted by the higher tax will move elsewhere. Transfer taxes and “stamps” often amount to thousands of dollars per transaction, which is income that is enormously profitable to states and local communities.
- What Is The Difference Between Warranty And Inspection?
A warranty and an inspection are very different. An inspection will show the condition of the home at a particular time. A warranty provides compensation if an approved repair is required during its warranty period. Even then, all warranties are not alike. Some will cover repairs only above a certain minimum, some have defect lists and the standards for these lists can vary, some warranty programs charge an inspection fee for each item.
- How Quickly Must I Apply For A Loan?
Many sales agreements will require the buyer to apply for a mortgage within a specific time period, for example, seven days after the contract has been signed. However, this is negotiable and can be any period of time that is agreeable to both parties.
This is important because if an application is not made, the buyer may be in violation of the sales agreement, which then could be grounds to forfeit the deposit. As a buyer, you should go through the sales agreement thoroughly before signing to make sure that all terms are known and understood. Working with a buyer’s broker can help in understanding any part of the agreement that may be confusing or unclear.
When meeting with a lender, you’ll want to obtain a letter which states that you have met and when you have met. You’ll also want to immediately provide this letter to the seller’s broker in the manner required by the sales agreement.
- What Is A Lease Option?
Sometimes a buyer does not want or cannot purchase immediately, and a seller does not want or cannot sell immediately. When this happens, both parties may agree on a lease option arrangement.
Generally, a lease option is an agreement where a prospective buyer moves into the property as a tenant. The buyer then has the right to buy the property for a specific price during the option period. The monthly rent is determined by the fair market rental rate plus an additional sum. The additional sum is credited to the buyer at closing, should the buyer decide to purchase the home. If the buyer does not decide to purchase the home, then the additional sum goes to the owner.
Real estate brokers can locate homes with the lease option available. Attorneys should review lease option contracts for both the buyer and the seller before either party signs. And before entering into a lease option agreement, speak with lenders to review current financing requirements.
There are many questions that can help you better understand the buying market. These ten should cover a lot of the basics, but if you have other questions, we work with a local mortgage company that we trust with all of our clients. Let us know if you’d like us to connect you!
Keeping It Real,
The Cloninger Properties Team